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How payroll changes impact your workers' comp insurance cost

August 5, 2021
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Hiring new employees and promoting current workers can impact your business in unexpected ways.

Insurance is one of the most important costs of doing business. Workers' comp insurance protects your team in the event of a workplace injury.

You might not realize it, but changes to payroll can affect your workers' comp insurance cost.

How is workers' comp insurance cost calculated?

The first step towards understanding your premium costs is to learn about these key terms and how they factor into the workers’ comp insurance cost.

Employee classification rate

Your insurer assigns your business a class code. The type of business you operate and the specific jobs your employees perform help determine your class code.

Each class code has a corresponding rate that identifies the risk for that type of work. The rate applies to every $100 of payroll.

For a more details on how class codes impact your Colorado workers' compensation policy cost, take a closer look at our guide to class codes.

Payroll

Your workers' comp insurance cost also factors in your annual payroll and remunerations.

Payroll and remunerations reference total compensation, including bonuses, commissions, and potentially vacation and sick days and other benefits. For more policy management information, check out this library of resources.

At the start of your policy year, you provide your insurer with an estimate of your payroll for the coming year. The insurer uses that number to generate an estimated premium.

At your policy's year-end, your insurer performs an audit to determine your actual payroll.

If you have overestimated your payroll, you'll get a credit or refund. If you have underestimated it, you'll owe more to the insurer.

Experience modification factor

An experience modification factor (e-mod) is a multiplier for calculating your workers' comp premium.

You may qualify for an e-mod factor, depending on the size of your business.

An e-mod rewards employers for good safety practices and minimal claims. On the other hand, it can penalize companies that report higher-than-average claims and losses.

Typically, your e-mod uses the past three years of your company's experience.

A neutral e-mod is 1.00. If you have filed fewer claims than the average business in your industry, your e-mod may total less than 1.00 and can lower your premium.

However, if you have filed more claims and your e-mod is greater than 1.00, your premium will be higher.

If you qualify, you can work to lower your e-mod factor.

Workers' compensation equation

Now that you understand the basics, it's time for some math. You can figure out your workers' compensation premium by using this equation:

Rate x (Payroll/100) x e-mod = Premium

How payroll impacts your workers' comp insurance cost

When you hire a new employee or issue raises, it's natural to expect your workers' compensation premiums to change. After all, payroll and your premium have a direct correlation.

What you might not realize is that other forms of compensation can impact premiums.

The National Council on Compensation Insurance (NCCI) defines payroll beyond salaries and wages.

It also includes remuneration, which NCCI determines as money or a substitute for money, and includes:

  • Commissions
  • Bonuses
  • Overtime pay
  • Holiday, vacation and sick pay
  • Payments by the employer for the employee as part of Social Security and Medicare taxes
  • Payments for piecework, profit-sharing or incentive plans
  • The rental value of housing, lodging or meals provided to employees as a part of their pay
  • Payments or allowances for tools used by employees in their work.
  • The value of gift cards or merchandise employees receives as part of their pay
  • Prevailing wages
  • Annuity plans
  • Expense reimbursements without a documented, valid business purpose
  • Payment (other than residuals) for filming commercials

NCCI also lists, for the purpose of workers' compensation, certain exclusions for payroll, including:

  • Tips or other gratuities received by employees
  • Payments for group insurance or group pension plans
  • The value of special rewards for individual invention or discovery
  • Severance payments, except for time worked or for accrued vacation
  • Payments for active military duty
  • Employee discounts on goods purchased from the employer
  • Meal payments for late work
  • Uniform allowances
  • Disability payments made by a third party, such as a group insurance carrier
  • Employer-provided fringe benefits, including company vehicles, travel, discounted services or memberships and tickets to entertainment events
  • Employer contributions to retirement or cafeteria plans

Avoid surprises by planning for payroll costs

No employers want to get a year-end surprise and end up paying more for workers' comp coverage.

To help avoid that outcome, determine your payroll ahead of time. Doing so can help you calculate your workers' comp insurance cost and get more accurate coverage.

As the year progresses, review your calculations. If you hire new people, issue raises or promote employees, update your coverage.

With Pinnacol, making coverage changes is easy. You can change your payroll estimates by using our online portal, or by contacting your agent or underwriter.

Doing so can spread any changes over the remaining policy term, helping you avoid unexpected changes at the policy's year-end.

See if Pinnacol is the best option for you. Get started with a quick and easy online quote or by connecting with an agent. 

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